Managing director personally liable for company’s tax obligations

In the light of current cases, I would like to explain some basic principles regarding a managing director’s personal liability for unfulfilled tax obligations. Early in 2017, the Munster Financial Court had succinctly summarized the current state of the jurisprudence and put a particular emphasis on the fact that even the observation of the German insolvency filing requirements might not prevent the managing director’s personal liability.

In general, the failure to meet tax obligations of the company may directly lead to the personal liability of the managing director (MD). As the Munster Financial Court (Finanzgericht (FG) Münster) stated in the aforementioned decision of February 2017, the application to commence insolvency proceedings alone does not exempt the company’s MD from this liability.

If the financial resources of the company are not sufficient for the satisfaction of all creditors, the MD is obligated to settle the company’s tax liabilities in roughly the same proportion as the claims of other creditors, so-called principle of pro-rata repayment (“Grundsatz der anteiligen Tilgung“).

According to the established case law of the German Federal Tax Court (Bundesfinanzhof, BFH), to which the FG Münster adhered, there is also no conflict of duties between the obligation to pay tax liabilities and the obligation to safeguard the company’s assets in the vicinity of insolvency (“Massesicherungspflicht“). The BFH had stated that the liability under §§ 69, 34 German General Tax Code (“Abgabenordung”, AO) would not be excluded even if the non-payment of taxes due fell into the three-week grace period granted to the managing director in order to determine the insolvency and remedy the situation or file for insolvency pursuant to § 15a para. 1 German Insolvency Act (“Insolvenzordnung”, InsO).

Furthermore, a managing director usually acts grossly negligent in not paying the taxes due: gross negligent within the meaning of § 69 AO is acting, who neglects to an extraordinary degree the care to which he is obliged and capable according to the circumstances and his personal knowledge and abilities. In accordance with the established case-law of the financial courts, such negligence is in particular established if the MD fails to comply with legal requirements, the observance of which must be demanded by every manager of a commercial enterprise. If the company did not have sufficient financial resources at the time of the tax date or thereafter, in order to be able to settle all corporate debts, including tax losses, the MD is grossly negligent if he does not use the available funds within the meaning of the above principle of pro-rata repayment.

Finally, the application for the commencement of insolvency proceedings alone does not exempt the MD from liability for non-payment of taxes. According to the case law of the BFH, the MD is obliged to pay the tax liabilities of the company until the latter is deprived of his or her authority by appointment of a (strong) insolvency administrator or opening of the insolvency proceedings. The legal position of the MD as the legal representative of the (tax) debtor and his administrative and disposal authority in external relations is also not restricted by aprovisional administration order.

Regularly, the execution of the respective order against the managing director also does not lead to an unfair hardship. Such an unfair hardship could be accepted basically only if the execution would lead to a threat to his economic existence. The circumstances of unfair hardship can only be taken into account to the extent that these have been substantiated before the decision and – if necessary by means of present evidence – have been proved to the satisfaction of the court. General phrases are not sufficient; on the contrary, the economic circumstances of the particular case must be explained in detail. However, even in the event of an unfair hardship, a suspension of execution is only possible if doubts as to the legality of the contested decision can not be ruled out.

This strict jurisprudence of Germany’s financial courts should be known to MD’s of German companies in crisis – there is an immense risk of personal liability here, even if the application for insolvency is filed in time.